It is often stated that project financing may be defined as "ounding of an independent project company, financed by the capital of one or more sponsors and without the right to compensation based on granted loans for the purpose of investing capital in assets (East Asia Analytical Unit, 1998). The project financing is most often used for new, independent, complex infrastructure projects with a high-level of risk and huge discrepancy of information available. Likewise the stakes of the sponsor's capital are decreasing, and the burden of financing is provided in the form of tranches of syndicated loans. Parallelly, the issue of municipal bonds is often stated as one of the source of financing the development of infrastructure of local governments. Therefore the purpose of this paper is to point out on potentials of municipal bonds as the source of financing of infrastructure projects through the concept of project finance Furthermore, this paper is also to underline constraints of the issue of municipal bonds, which is the exact reason why this concept has never took root sufficiently as a concept of obtaining additional funds in Serbia The paper is divided in several chapters. The Chapter is dedicated to the role of banks in project financing of infrastructure projects, the Chapter II elaborates on municipal bonds as a model of project financing of infrastructure projects, while the Chapter ill provides a brief overview of options which municipal bonds offer as an alternative model of financing. The next chapter presents experiences which other countries in the region had in using municipal bonds as the source of project financing, followed by the chapter giving the review of revenues. The last one is reserved for concluding remarks 2. ROLE OF BANKS IN PROJECT FINANCING OF INFRASTRUCTURE PROJECTS During the phase of initial overview and structuring of project financing, leading banks ie banks-loan- providers, became the project insiders working with project sponsors. At the same time they became accountable for loan financing by means of overall syndicated loans by attracting other banks which became members in loan syndication (Gatti et al, 2008). As the respective loans do not include the indemnity clause, i.e. they relate to financing of Project Company with or without limited support from the sponsor, the loan syndication itself (deriving from syndication of the capital of financial institutions which fund the project) is in many way responsible for operational risk. By assigning the project a higher leverage, the operational risk must be reduced to an acceptable level. This is exactly where one of the key advantages of project financing lies- it is possible to allocate a specific risk of the project crisk of project realization and operational risk, risk of generating revenue and risk of adequate pricing, and risk of political influence and expropriation) to those participants who deal best with them (Brealey et al, 1996). As for credit lines intended for project financing of infrastructure projects there is no significant correlation between the use and project closure timeframe. The issue related to liquidity of this model of project financing is mainly the consequence of inevitable reliance on cash flow of the project, expected higher leverage ratio, and volatile level of risk immanent in certain stages of the project There are many reasons behind 'pros and cons" for both loans and bonds when considering project financing as the model for financing infrastructure. Thus Yascombe (2010) points to the fact that credit risk associated with investment in project, in particular the one referring to a long-term projection of inflation cannot be curbed with bank arrangements; however, when it comes to the issue of bonds, on specific markets they can be derived based on inflation index (inflation-indexed bonds). Additionally, money collected through the issue of bonds may be withdrawn in bullet, whilst with the loan arrangement it may not be the case At the same time, loan arrangements may be rather flexible when it comes to repayment of borrowed funds, and in case of refunding of assets collected by means of bond issue, it is provided by repurchase i.e. call option. Furthermore, banks are very prudent is controlling all changes which refer to the project agreement and project company whilst creditors bond buyers control only large-scale cases which have a considerable impact on coverage of cash flow of the project or security It is true to say that due to the fact that obtaining financial resources from financial institutions such as banks is often dependent on situation on the capital market and level of financial resources needed for financing infrastructure projects. Thus, during 2013 the banking sector in the whole Europe and even in Serbia shows a dramatic decline in lending activity of economy. Namely, in the first eleven months of 2013, lending decreased in net amount of EUR 0.9 million which is 9% compared to December 2012 (NBS, 2013). In the circumstances of moderate lending activity, evidently reduced risk appetite, and high share of NPL (Non- performing loans) of commercial banks in Serbia, the question is to how to finance infrastructure long-term projects. This at same time implies the need for new, i.e. alternative models of project financing 37